Rents Are Out Of Control - Or Are They?

When the pandemic hit the United States and lockdowns closed many businesses, Montgomery County's unemployment rate rocketed from 3.3 percent in January 2020 to 9.8 percent in April. The County Council responded with emergency bills designed to keep people in their homes, including legislation that placed strict limits on rent increases.

As vaccines became widely available the government began lifting emergency measures. Average rents spiked 9 percent in 2021 as rent controls were allowed to expire. Now advocates are pressing the Council to adopt permanent rent control legislation, and County Executive Marc Elrich is talking about tight rent limits even for recently built units.

An Idea Whose Time Has Come - And Gone

As it turns out, the steep increase in rents during 2021 was an outlier, probably because the expiration of the emergency controls adopted at the beginning of the pandemic allowed landlords to "catch up" on increases they otherwise would have passed on earlier. Despite the sharp rise in 2021, rents increased an average of 2.1 percent a year for the past decade.

As this chart shows, rent increases have generally been in the neighborhood of 2 percent a year, and during the first year of the pandemic they actually dropped by 1.8 percent:

Compared to the rate of price increases in the economy as a whole, rents have actually declined over the past decade, averaging a 0.4 percent decrease after adjusting for inflation. According to CoStar, a real estate data provider, average effective rents for newer apartments in Montgomery County are now about $2,000 a month versus just under $1,600 a month in 2012. The fact is that $2,000 in 2023 doesn't go as far as $1,600 did in 2012.

But let's be clear: if you thought 2021's rent increases went beyond the price increases for many other goods and services, you're right. As this chart shows, 2021 was a clear exception in running 2.1 percent ahead of inflation:

Meanwhile, the job market has recovered smartly. After an alarming increase during the early lockdowns the unemployment rate has dropped to a little over 3 percent, at or below the pre-pandemic level.

Yes, The Rent Is (Still) Too Damn High

There's no denying that many people are struggling to pay for housing, and inflation throughout the economy has eroded income gains. The question, though, is whether rent control is the right response at a time when unemployment is back near record lows, rent increases have been modest by just about any measure, and landlords are facing the same inflationary pressures as renters. Rent control and eviction moratoria to protect tenants during the height of a public health emergency are one thing, but capping rents as a long-term strategy for housing affordability poses very different questions.

Affordability Is A Big Problem, But Rent Control Threatens To Torpedo New Construction

The case against rent control has been made many times by many different people, but it bears repeating that it has not worked out well in many places where it has been tried. The city of Takoma Park, for example, adopted a rent control law in 1981 that is in some ways similar to proposals discussed by Councilmember Will Jawando, County Executive Marc Elrich, and the Renter's Alliance. Not a single market-rate apartment building has been built in Takoma Park since 1983, when the City Council reduced allowable rent increases from 10 percent to 5 percent (Takoma Park now uses an inflation-based cap). Tenants in rent controlled units get protected, but without new supply more and more people are left out.

St. Paul, Minnesota also offers a cautionary case study. That city set tight limits on rent increases in 2020, while neighboring Minneapolis relaxed zoning restrictions and chose not to adopt rent control legislation. Here's what happened to construction of new apartments:

What About Gouging?

Some form of rent control appears inevitable, and Planning and Housing Committee Chair Andrew Friedson seems to be trying to find a way to satisfy progressives without dragging down development of new rental housing. So is there room for a bill that regulates rents without choking off supply but still protects tenants?

While the data charted above shows that rent growth in recent years has generally been modest in comparison to inflation, sometimes the introduction of a new variable, such as Amazon's announcement of a new headquarters in Arlington, can sharply increase rents. Over the long term, additional supply is the best way to counter these kinds of effects, but in the near term limits on rent increases might be justified as anti-gouging measures. And when individual landlords impose large rent increases, the impact on tenants can be significant even if they can find another place to live.

Some jurisdictions, such as Portland, Oregon and the state of California, have adopted rent regulation that prohibits drastic increases but are much less restrictive than rent control laws in Takoma Park, New York City, or San Francisco. These looser forms of rent regulation typically cap annual increases at a level well above the rate of inflation - for instance, Oregon limits rent hikes to no more than the annual increase in the Consumer Price Index plus 7 percent - so they allow a lot of flexibility while still offering a degree of protection.

The Details Matter, But So Does The Bigger Message

Rent control comes in different forms, some of which are much more restrictive than others. Some laws apply only to older buildings, which in theory avoids disincentives for new construction. The District of Columbia, for example, has a law that exempts buildings built after 1975, although advocates are pressing to bring more properties under its coverage. Former Takoma Park Councilmember Fred Schultz has outlined a collection of other ideas for reducing the impact of rent control on incentives for development of new units.

Even if the County Council follows the Oregon model and avoids tight caps on rent increases, though, the result is likely to be less new construction over the medium to long term and limited protection for tenants in the short term. A consensus seems to have emerged that the county needs more housing, but the County Council must find a way to encourage more market rate housing production even as it seeks to protect tenants.